Farming Company Production Competitive Market

Question: Describe about the Farming Company Production for Competitive Market. Answer: Part A Introduction Silo Pty Ltd is a farming company that specialises in the production of wheat and barley. It is known that the company is one of the producers in the international market for these commodities. The aim of this analysis is to understand the concept of demand elasticity in context of the firm along with a reference to the various factors impacting demand and supply of the commodities given. Based on the analysis of these factors, conclusion would be drawn with regards to the elasticity of the business. Demand and Supply Factors The three factors that would be impacting the demand of wheat and barley are highlighted below. Demand supply mismatch in global market It may be possible that any particular major consumer may suffer some calamity as a result of which it turns into a net importer. This leads to a crisis in the international markets and leads to higher demand. Food preferences of consumers It is likely that as the income of the consumers increase, they may shift preference in favour of more protein rich diet and thus lower the per capital consumption of wheat and barley. Increased demand of products made from wheat and barley A plethora of products are based on wheat flour and barley and any increase in the demand of these products would cause the demand for wheat and barley to increase. The three factors that would be impacting the supply of wheat and barley are highlighted below. Production trends in Australia Australia is a major producer of wheat and barley and thus any catastrophic incident such as floods, drought or cyclone may affect the supply of these commodities. Government Policies The farming trend in various countries including Australia is impacted by the relevant government policies in terms of the cropping trend which in turn may be affected by the amount of subsidies and support prices offered by the government with regards to crops and related inputs and infrastructure. Market Prices- In case when there is sustained trends where the global prices of these commodities are high, the supply tends to shift in favour of these crops as farmers want to make higher profits. However, lower prices would typically change the cropping pattern in the favour of other lucrative crops. Elasticity and Conclusion One of the foremost measures of elasticity is the demand elasticity. It is defined as the percentage change in the quantity demanded when the price changes by a unit percentage. The underlying elasticity is defined by the extent of availability of close substitutes along with the type of goods. Further, the impact of income on consumption is measured by the income elasticity. It is expected that for wheat and barley, demand elasticity would be lower than 1 and hence the demand would be inelastic. This is primarily because these items especially wheat constitutes as a staple food for a major population and is a key ingredient for various processed foods company. As a result, even if the price increases, people cannot alter their taste preferences in the short run and hence consumption is not much impacted. Further, depending upon the extent of these foods in the normal diet, the availability of substitutes is also low with rice being the only major possibility but in Australia, produc tion of rice is very less. Part B In this case, there has been a bumper harvest in the US and South America which has led to increase in the wheat yields. As a result of increase in the wheat yields in the above countries, there would be an increase in the supply of wheat in the global market. This would be reflected in the rightwards shift in the supply curve shown below. It is apparent from the above figure, that due to an increase in the supply, the supply curve has shifted to the right, thereby increasing the equilibrium quantity from Q1 to Q2. However, since the demand in the short term would remain constant, hence the equilibrium price would decrease from P1 to P2. Part C In this particular case, there is a tax introduced by the government on fertilizers due to the environmental damage caused by fertilisers. As a result of the tax on fertilisers, the cost of fertilisers would increase. Since fertiliser is a key input in cultivation of wheat and barley, hence the overall cost would increase for these farmers and hence cause a decrease in the supply which is indicated by the leftward shift in the supply curve shown below. As is apparent from the graph above, higher price would cause the supply to decrease while the demand in the short term would remain constant. Due to this movement in the supply curve, the equilibrium price would increase as indicated above while the equilibrium quantity would also decrease. Market Structure The given market structure in which Silo Pty Ltd operates is a perfectly competitive market, This may be explained on account of the following reasons. The company is only one of the many producers in the market, hence there are many sellers in the market. Also, considering the wide usage of wheat and barley, the number of buyers is also likely to be many. Further, the price of wheat and barley cannot be influenced by the company or any particular one company and is essentially determined based on global demand and global supply forces. Hence, the companies engaged in farming of these commodities are price takers and not price makers. Also, the entry barriers and exit barriers in farming business are typically low which allow the firms can easily enter and exit.